MORTGAGE TERMS
Every industry has it’s own language, and the home mortgage industry is no different. Here are some of the more common terms with their translations. Do you know what the term ‘Mortgage’ really means? Loosely translated, it’s ‘death debt’. In the late 1700’s a debt that would go unpaid in the event of the borrower’s death was called a mortgage. Morte, being Latin for death, and gage is a French variation for measurement, so it literally meant that the borrower paid on the debt until death. Kind of feels like that sometimes.
Fixed Rate Mortgage:
The interest rate and the payment never change for the life of the loan regardless of the remaining loan balance.
Adjustable Rate Mortgage or ARM:
The interest rate can change at pre-determined intervals. A 3/1 ARM would have a fixed rate for 3 years and then be subject to change up or down every year thereafter. Did I say down? It actually can, and these loans typically have lower interest rates than a 30 year fixed rate mortgage.
Interest Only Option Mortgage:
The operative word here is Option. You are required by the lender to pay the interest that accrues each month. In doing so the principle balance, or original loan amount never goes down. Why would anyone do that? It can make sense and we’ll talk about that if you wish. You can make a larger payment each month and by doing so the required interest payment would be reduced as the principal balance is reduced.
LTV or Loan to value:
If you purchase a home for $100,000.00 and finance $80,000 your LTV would be 80%. LTV or Combined Loan to Value: This addresses the combination of a first and second mortgage. In the above illustration, if there was a second mortgage of $20,000.00, the LTV would be 80% and the CLTV would be 100%.
M.I. or Mortgage Insurance:
If you finance an amount of money greater than 80% of the value of your home the lender requires that you purchase insurance that guarantees the lender full re-capture of their investment in the event of a foreclosure. Without this insurance the lender would only be able to re-capture 80% of the value of the home. The monthly premium for mortgage insurance is anywhere from $50.00 to $70.00 per $100,000.00 depending on LTV. Beginning January 1, 2007, mortgage insurance is tax deductable for PURCHASE TRANSACTIONS ONLY. I could go on and on, but what I really want to do is talk to you, not teach you the business. Give me a call and let’s have that conversation.